{"id":13538,"date":"2024-04-04T07:04:28","date_gmt":"2024-04-04T11:04:28","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=13538"},"modified":"2026-02-12T04:08:42","modified_gmt":"2026-02-12T09:08:42","slug":"cost-of-goods-sold-what-is-it-and-how-to-calculate-it","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/cost-of-goods-sold-what-is-it-and-how-to-calculate-it\/","title":{"rendered":"Cost of goods sold: What is it and how to calculate it?"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tCost of goods sold: What is it and how to calculate it?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-04-04T07:04:28-04:00\">April 4, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"Cost of goods sold: What is it and how to calculate it?\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/cost-of-goods-sold-what-is-it-and-how-to-calculate-it\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/danielheathcote\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2023\/12\/Daniel-Heathcote.jpg\" class=\"entry-author__image\" alt=\"daniel-heathcote-author\" \/>\t\t\t\t<span class=\"entry-author__name\">Daniel Heathcote<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>Understanding the cost of goods sold (COGS) is crucial for businesses to accurately assess their profitability and manage financial health.&nbsp;&nbsp;<\/p>\n\n\n\n<p>In this article, we talk about what COGS is, its meaning and importance, and the formula for calculating it.&nbsp;<\/p>\n\n\n\n<p><strong>Here&#8217;s what we cover:<\/strong><\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#what\" data-level=\"2\">What is cost of goods sold?<\/a><\/li><li><a href=\"#how\" data-level=\"2\">How to calculate cost of goods sold?<\/a><ul><li><a href=\"#h-cogs-formula-nbsp\" data-level=\"3\">COGS formula &nbsp;<\/a><\/li><li><a href=\"#h-example-calculation-nbsp\" data-level=\"3\">Example calculation &nbsp;<\/a><\/li><li><a href=\"#h-understanding-cogs-meaning-and-importance-nbsp\" data-level=\"3\">Understanding COGS meaning and importance &nbsp;<\/a><\/li><li><a href=\"#h-how-to-find-cost-of-goods-sold-nbsp\" data-level=\"3\">How to find cost of goods sold &nbsp;<\/a><\/li><\/ul><\/li><li><a href=\"#costs\" data-level=\"2\">Cost of goods sold strategies &nbsp;<\/a><ul><li><a href=\"#h-higher-profit-margins\" data-level=\"3\">Higher profit margins<\/a><\/li><li><a href=\"#h-operational-efficiency\" data-level=\"3\">Operational efficiency<\/a><\/li><li><a href=\"#h-pricing-flexibility\" data-level=\"3\">Pricing flexibility<\/a><\/li><li><a href=\"#h-financial-health\" data-level=\"3\">Financial health<\/a><\/li><\/ul><\/li><li><a href=\"#final\" data-level=\"2\">Final thoughts &nbsp;<\/a><\/li><\/ul><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what\"><strong>What is cost of goods sold?<\/strong><\/h2>\n\n\n\n<p>COGS represents the direct costs attributable to the production of the goods sold by a company.&nbsp;&nbsp;<\/p>\n\n\n\n<p>This includes the cost of the materials and labor directly used to create the product, but it excludes indirect expenses, such as distribution costs.&nbsp;&nbsp;<\/p>\n\n\n\n<p>COGS is a critical metric because it affects a company\u2019s gross profit and net income, so understanding its components is essential for effective financial analysis and business strategy.&nbsp;<\/p>\n\n\n\n<p>COGS is not just a figure on the balance sheet but a reflection of a company\u2019s operational efficiency and the first factor to consider when you <a href=\"https:\/\/www.sage.com\/en-us\/blog\/what-is-markup-percentage\/\" target=\"_blank\" rel=\"noreferrer noopener\">calculate markup<\/a>.<\/p>\n\n\n\n<p>Lowering the COGS, without sacrificing quality, can significantly improve a company\u2019s profitability.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><strong>How to calculate cost of goods sold?<\/strong><\/h2>\n\n\n\n<p>Calculating the cost of goods sold involves several components and can vary slightly depending on the accounting method used by the business.&nbsp;&nbsp;<\/p>\n\n\n\n<p>However, the basic COGS formula is a good starting point for understanding how this financial metric is derived.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cogs-formula-nbsp\"><strong>COGS formula<\/strong>&nbsp;<\/h3>\n\n\n\n<p>COGS = (Beginning Inventory + Purchases during the period) \u2013 Ending inventory, i.e. goods not yet sold&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Beginning inventory<\/strong><strong>: <\/strong>The value of all inventory held by a company at the start of the period.&nbsp;<\/li>\n\n\n\n<li><strong>Purchases<\/strong><strong>: <\/strong>The total cost of inventory purchased during the period, including materials and direct labor.&nbsp;<\/li>\n\n\n\n<li><strong>Ending inventory<\/strong><strong>: <\/strong>The value of inventory remaining at the end of the period.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>By subtracting the ending inventory from the sum of the beginning inventory and purchases, businesses can determine the cost of goods that were sold during the period.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-example-calculation-nbsp\"><strong>Example calculation<\/strong>&nbsp;<\/h3>\n\n\n\n<p>If a company starts the year with $5,000 in inventory, makes $2,000 in purchases, and ends the year with $3,000 in inventory, the COGS would be calculated as follows:&nbsp;<\/p>\n\n\n\n<p>$5,000 + $2,000 \u2212 $3,000 = $4,000&nbsp;&nbsp;<\/p>\n\n\n\n<p>This calculation shows that $4,000 of inventory was used to produce goods sold during the year.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-understanding-cogs-meaning-and-importance-nbsp\"><strong>Understanding COGS meaning and importance<\/strong>&nbsp;<\/h3>\n\n\n\n<p>The meaning of COGS goes beyond a simple calculation.&nbsp;&nbsp;<\/p>\n\n\n\n<p>It reflects the direct cost of producing the goods that a company sells, making it a key figure in determining gross profit and for strategic pricing, inventory management, and operational planning.&nbsp;<\/p>\n\n\n\n<p>COGS provides insights into the efficiency of a company\u2019s production process and supply chain management.&nbsp;&nbsp;<\/p>\n\n\n\n<p>A rising COGS might indicate rising material costs or inefficiencies in production, while a decreasing COGS could suggest improvements in cost control or production processes.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-how-to-find-cost-of-goods-sold-nbsp\"><strong>How to find cost of goods sold<\/strong>&nbsp;<\/h3>\n\n\n\n<p>Finding the COGS requires accurate record-keeping of inventory levels and purchases.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Businesses should maintain detailed records of inventory purchases, production costs, and inventory counts at the beginning and end of each accounting period.&nbsp;&nbsp;<\/p>\n\n\n\n<p>This data is then used in the COGS formula to calculate the cost of goods sold accurately.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"costs\"><strong>Cost of goods sold strategies<\/strong>&nbsp;<\/h2>\n\n\n\n<p>Generally, businesses aim to keep COGS as low as possible without compromising product quality. <\/p>\n\n\n\n<p>Here\u2019s why:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-higher-profit-margins\"><strong>Higher profit margins<\/strong><\/h3>\n\n\n\n<p>A lower COGS means you are able to produce your goods at a lower cost, which can lead to higher profit margins when selling products at the market price. <\/p>\n\n\n\n<p>This is particularly advantageous in competitive markets where pricing power might be limited.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-operational-efficiency\"><strong>Operational efficiency<\/strong><\/h3>\n\n\n\n<p>A lower COGS often reflects operational efficiencies, such as more effective supply chain management, bulk purchasing discounts, or technological improvements in production. <\/p>\n\n\n\n<p>These efficiencies can contribute to a competitive advantage.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-pricing-flexibility\"><strong>Pricing flexibility<\/strong><\/h3>\n\n\n\n<p>With a lower COGS, a business has more flexibility in its pricing strategy. <\/p>\n\n\n\n<p>It can price products competitively to gain market share or choose to maintain higher profit margins.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-financial-health\"><strong>Financial health<\/strong><\/h3>\n\n\n\n<p>A lower COGS contributes positively to the bottom line, improving a company&#8217;s overall financial health. <\/p>\n\n\n\n<p>This can enhance the company&#8217;s ability to invest in growth opportunities, pay dividends, or weather economic downturns.&nbsp;<\/p>\n\n\n\n<p>However, it\u2019s important to balance efforts to reduce COGS with the need to maintain product quality and customer satisfaction.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Cutting costs too aggressively could compromise product quality and negatively impact brand reputation and sales over the long term.&nbsp;<\/p>\n\n\n\n<p>In some cases, a higher COGS might be strategic or reflect a company\u2019s investment in high-quality materials, superior craftsmanship, or ethical sourcing, which can justify higher selling prices and cater to specific market segments.&nbsp;<\/p>\n\n\n\n<p>Ultimately, the goal is not simply to minimize COGS but to optimize it in a way that supports your business strategy, maintains product quality, and maximizes profitability.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"final\"><strong>Final thoughts<\/strong><strong><\/strong>&nbsp;<\/h2>\n\n\n\n<p>Understanding the cost of goods sold is essential for any business looking to optimize its financial performance.&nbsp;&nbsp;<\/p>\n\n\n\n<p>By accurately calculating COGS, businesses can gain valuable insights into their operational efficiency, cost management, and profitability.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Keeping accurate records and understanding the components that contribute to COGS can help businesses make informed decisions, improve their financial health, and achieve long-term success.&nbsp;<\/p>\n\n\n\n<p><em>Editors note: This article was first published in December 2022 and has since been updated for relevance.<\/em><\/p>\n\n\n\n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Small business survival toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get your free guide, business plan template, and cash flow forecast template to help you run your business and achieve your goals.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-aee5a8c2-281d-42bb-8da2-eda5b62f63c6\"\n\t\t\t\t\t\tclass=\"single-cta__button button 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sold (Cogs) is a crucial business metric. Find out what Cogs is, and how to calculate and account for it in your business.<\/p>\n","protected":false},"author":1762,"featured_media":13539,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[43,49],"tags":[110,195,4,299,420,153,19],"business_type":[40],"lilypad":[],"context":[],"industry":[],"persona":[150,96,97,95],"imagine_tag":[209,468,233,230,231,237],"coauthors":[921],"class_list":["post-13538","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","category-trends-insights","tag-accounting-101","tag-boss-your-business","tag-business-intelligence","tag-cash-flow","tag-cloud-financial-management","tag-growing-a-business","tag-inventory-management","business_type-small-business"],"sage_meta":{"region":"en-us","author_name":"Daniel Heathcote","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/12\/GettyImages-808410210-708x708-1.jpg","imagine_tags":{"209":"Accounting","468":"Grow your business","233":"Medium Businesses","230":"Small business","231":"Start up business","237":"Supply Chain Management"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice US","distributor_original_site_url":"https:\/\/www.sage.com\/en-us\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/13538","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/users\/1762"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/comments?post=13538"}],"version-history":[{"count":1,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/13538\/revisions"}],"predecessor-version":[{"id":34580,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/13538\/revisions\/34580"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media\/13539"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media?parent=13538"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/categories?post=13538"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/tags?post=13538"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/business_type?post=13538"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/lilypad?post=13538"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/context?post=13538"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/industry?post=13538"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/persona?post=13538"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/imagine_tag?post=13538"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/coauthors?post=13538"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}